No. 49: EB-5 Visa and African Investment in the US

As the number of wealthy individuals in Africa grows, I wonder if the US will see more public investment from such individuals. For example, Tony Elumelu invested an undisclosed amount in a California-based satellite startup last year. Will we see more folks follow the lead of, say, the Qatari government which gave around $100 million towards Hurricane Katrina recovery efforts in Louisiana. The pharmacy school building at Xavier University is now called the Qatari Pharmacy Pavilion. A $100 million investment may be a bit steep for an African government or individual, but not totally out of reach. Aliku Dangote made waves during the US-Africa Leaders Summit when he announced an investment $1 billion in Nigeria’s rice market, and a 50/50 co-investment with the Blackstone Group of $5 billion in Sub-Saharan Africa’s energy infrastructure.

The EB-5 visa program has been a popular vehicle over the past several years for wealthy individuals from around the world to secure residency in the US. Investors commit to placing a minimum of $500,000 or $1 million (depending on the location) in an enterprise that creates at least 10 full-time paying jobs. Real estate projects seem to be the most popular targets for these investments. Regional centers registered with the US government market these projects to aspiring visa-holders and pool the funds. Chinese investors have been the heaviest users of the program, often due to the specter of crackdowns from the Chinese government’s campaign against corruption in the country.

I understand that the program has been used pretty regularly by African investors. It would be interesting to see a breakdown of where EB-5 investors are coming from on an annual basis. There’s not much recent data on the program, but it is facing scrutiny this year due to some cases of fraud. I imagine that data on the program will emerge from Congressional hearings on its efficacy. Something to watch.

No. 46: Is A Tax Credit Going to Encourage US Investment in Africa?

Is the right next step for promoting American business investment in African markets a tax credit that encourage American companies to repatriate their investments on the continent? The Africa Report ran an interview in November with Rosa Whitaker, head of the Whitaker Group. She argues that this tax credit is the right investment response for US-Africa business policy. Initially, I thought this was a great idea, and then questions started coming up. I’ll lay them out here, will do my homework over the next few days and come back with another post and hopefully, a few answers.

The US’ international corporate tax law has gained increased attention with the likes of Burger King moving their headquarters to Canada in order to benefit from a more favorable corporate tax structure. Currently, multinationals pay taxes to the country in which they operate, and also pay taxes to the US. Companies like Apple go to great lengths to avoid paying these taxes while remaining within the law. President Obama took executive action to counter inversions like that implemented by Burger King, and has talked about ways to encourage companies like Apple to bring their profits back to the US. Ms. Whitaker’s argument for a tax credit for US company investments in African markets fits within this debate.

A tax credit could be an attractive investment incentive for American companies, but what could be the impact on African countries? A number of African countries with the support of the African Development Bank are working to improve their ability to negotiate deals with multinationals. Furthermore, African countries are under pressure to not become tax havens, though the appeal of multinationals parking hundreds of millions of dollars in the country is tough to say no to.

I would be interested to see available data on tax compliance among US companies operating in African countries. I wonder if Morten Jerven has any of that in his book on Africa’s data problem. During the U.S.-Africa Leaders Summit, Mo Ibrahim pointedly called out companies doing business on the continent for not paying their taxes. The rise of the big private equity firms – KKR, Blackstone, and Carlyle – has brought questions about how much of the returns from their investments will remain on the continent once an attractive exit opportunity presents itself.

What alternatives are there to a tax credit? Who are the smartest people on this topic? I look forward to working on these questions and getting my observations out in a post a little later on.

No. 4: The World Cup’s Impact on South Africa

I appreciate my sister, Chenae, asking me whether the World Cup will really help South Africa’s economy. My response to her question follows:

I worry about South Africa’s ability to maintain these huge stadiums it has built. They could drain resources. 50,000 people aren’t going to watch professional games on a regular basis. Another concern is that many of the jobs the World Cup has generated are temporary. While these temporary jobs help, South Africa needs a whole lot more permanent jobs to bring it’s unemployment rate down from 25 percent.

There is a lot of upside to the World Cup. South Africa is already Africa’s biggest economy, and the World Cup further bolsters its visibility. Venture capitalists and the like will be encouraged to restart the investment that raised Africa’s economic growth to 6 percent. South Africa could lead the way for renewed investments on the continent.

South Africa needs to be really aggressive about selling itself to foreign investors. It needs to prepare its people to leverage foreign investments in the country. A typical side effect of events like the Olympics and World Cup is a large group of displaced people. South Africa needs to push hard to make these people whole in any way possible: education, job training, etc. This is really important because the country has been experiencing a lot of xenophobia in the past year. A lot of immigrants have died in the past year, due to riots in which native South Africans have released their anger over job competition with immigrants.

I think that if South Africa can leverage the World Cup to attract foreign investment and to engage the lower class — native and immigrant, the country can see steady economic growth, and finally move firmly into classification as a developed country.